Do you want to buy a new vehicle, but are worried about getting approved for a car loan? A lender considers a number of factors when deciding whether to approve an auto loan. Your credit score is one of the most important factors.
Your credit score is based on how you handle debt. FICO® Scores are the most popular method of calculating credit scores. According to Fair Isaac Corporation, 90% of top lenders use the FICO® Score.
The model uses your payment history, the age of your debt accounts, and your credit utilization to predict whether you are likely to repay a debt. Credit scores range from 300 to 850, but the average FICO® credit score is 716. A high credit score increases your chances of getting approved for a car loan with favorable terms.
WHAT CREDIT SCORE SHOULD YOU HAVE TO BUY A CAR?
A credit score of 700 or above is preferential for getting a low-interest rate on your auto loan. If you have a credit score of 740 or higher, you can qualify for the best rates and loan terms. It is not necessary to have a credit score of 700 to buy a car. You can purchase a vehicle with a credit score as low as 500.
In order to compensate the lender for the additional risk involved, you may have to pay a higher interest rate if you have a low credit score. Once your credit score drops below 500, getting approved for an auto loan becomes increasingly difficult.
WHICH CREDIT SCORE DO MOST CAR DEALERSHIPS USE?
FICO® Auto Scores are often used by car dealerships as a credit scoring model. This number varies between 250 and 900. This score examines your previous use of car loans more closely than conventional credit scores. The FICO® Auto Score weighs your previous car loan payment history and whether you’ve ever had a car repossessed more heavily.
HOW CAN YOU POSITIVELY IMPACT YOUR CREDIT BEFORE BUYING A CAR?
As much as possible, you should improve your credit rating before applying for car loans. Check your credit report for any errors. You can dispute these errors with the credit reporting agencies.
Secondly, make all your loan payments on time. You should not use more than 30% of your available credit if you use revolving credit, such as credit cards or credit lines. If you have a credit card with a balance of $10,000, pay it down so the balance is $3,000 or less.
Third, do not close old accounts that you don’t use, as this will lower your credit score.
Furthermore, a credit monitoring service can provide you with tools, reports, and analysis, so you know what steps to take to increase your credit score.
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